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Question: Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business

17 Oct 2022,12:40 AM

 

Capital Budgeting

1. Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will:

 

a. Generate first-year revenues of $2.25 million. These revenues are expected to grow at 10 percent per year for the next 8 years.

b. Year 1 incremental operating costs of this new business are expected to total $950,000 and to grow at 5 percent per year for the next eight years.

c. The firm’s marginal tax rate is 40 percent, but its average tax rate is only 35 percent.

d. Depreciation expenses are expected to be $100,000 during year 1, $200,000 during year 2, and $175,000 during year 3.

e. Capital outlays required at time 0 total $2 million, and another $500,000 will be required at the end of year 1. 

f. Networking capital investments of $50,000, $75,000, and $105,000are expected at the end of years 1, 2, and 3 respectively.

 

Calculate the expected net cash flows for year 3?

 

 

2.The Taylor Mountain Uranium Company currently has annual revenues of $1.4 million and annual expenses exclusive of depreciation of $700,000. Depreciation amounts to $200,000 per

year. These figures are expected to remain constant for the foreseeable future (at least 15 years).

 

The firm’s marginal tax rate is 40 percent.

 

A new high-speed processing unit costing $1.2 million is being considered as a potential investment designed to increase the firm’s output capacity.

 

i. This new piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value.

ii. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.75 million, and annual expenses exclusive of depreciation will increase to $950,000. Annual depreciation will increase to $350,000.

iii.Assume that no increase in net working capital will be required because of this project.

 

a. Calculate the processing unit’s net present value, using a 14 percent required return.

 

b. Should Taylor accept the project?

 

c. How many internal rates of return does the processing unit project have? Why?

 

d. Calculate the processing unit’s internal rate of return.

Expert answer

 

Hayward Enterprises' first-year revenues from its laser-engraved self-portrait business are expected to be ...

 

Hayward Enterprises' first-year revenues from its laser-engraved self-portrait business are expected to be $2.25 million. This business is anticipated to grow at a rate of 10 percent per year for the next eight years, resulting in cumulative revenues of $13.5 million. Hayward Enterprises' success in this new venture will depend on its ability to produce high-quality laser-engraved self-portraits at a competitive price. The company's existing expertise in imaging products should give it a significant advantage in this new business. Hayward Enterprises is committed to providing its customers with the best possible products and services and is confident that it can successfully enter the laser-engraved self-portrait market. Thanks for considering Hayward Enterprises as your go-to source for all your laser-engraved self-portrait needs!

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